1. On January 1, 2012, Sammy Corp. granted an employee an option to purchase 9,000 shares of Sammy’s $5 par value common stock at $20 per share. The Black-Scholes option pricing model determines total compensation expense to be $210,000. The option became exercisable on December 31, 2013, after the employee completed three years of service. The market prices of Sammy’s stock were as follows: January 1, 2012 $30 December 31, 2014 50 For 2012, Sammy should recognize compensation expense under the fair value method of a. $90,000. b. $150,000. c. $70,000. d. $0. 2. The adjusted trial balance for Livingstone Corp. at the end of December 2013, contained the following accounts. 5-year Bonds Payable 8% $2,000,000 Bond Interest Payable 50,000 Premium on Bonds Payable 100,000 Notes Payable (3 mo.) 40,000 Notes Payable (5 yr.) 165,000 Mortgage Payable ($15,000 due currently) 200,000 Salaries Payable 18,000 Taxes Payable (due 3/15 of 2014) 25,000 The total long-term liabilities reported on the balance sheet are a. $2,365,000. b. $2,350,000. c. $2,465,000. d. $2,450,000. 3. On January 1, 2012, Brian Co. leased a building to Henry Corp. for a ten-year term at an annual rental of $140,000. At inception of the lease, Brian received $280,000 covering the first two years’ rent of $140,000 and a security deposit of $140,000. This deposit will not be returned to Henry upon expiration of the lease but will be applied to payment of rent for the last two years of the lease. What portion of the $280,000 should be shown as a current and long-term liability, respectively, in Brian’s December 31, 2012 balance sheet? Current Liability Long-term Liability a. $0 $280,000 b. $70,000 $140,000 c. $70,000 $210,000 d. $140,000 $70,000 ACCT 610 (Spring 2014) – Exam 3 Dr. Anakwe Page 4 4. Lorrie Corp., a company whose stock is publicly traded, provides a noncontributory defined-benefit pension plan for its employees. The company’s actuary has provided the following information for the year ended December 31, 2013: Projected benefit obligation $6,500 Accumulated benefit obligation 5,250 Fair value of plan assets 8,250 Service cost 2,400 Interest on projected benefit obligation 24,0 Amortization of prior service cost 600 Expected and actual return on plan assets 825 The market-related asset value equals the fair value of plan assets. No contributions have been made for 2013 pension cost. In its December 31, 2013 balance sheet, Lorrie should report a pension asset / liability of a. Pension liability of $6,500 b. Pension asset of $8,250 c. Pension asset of $1,750 d. Pension liability of $5,250 5. On January 1, 2014, Danny Co. redeemed its 15-year bonds of $3,500,000 par value for 102. They were originally issued on January 1, 2002 at 98 with a maturity date of January 1, 2017. The bond issue costs relating to this transaction were $210,000. Danny amortizes discounts, premiums, and bond issue costs using the straight-line method. What amount of loss should Danny recognize on the redemption of these bonds (ignore taxes)? a. $126,000 b. $107,333 c. $84,000 d. $79,333 6. At the December 31, 2012 balance sheet date, Universal Corporation reports an accrued receivable for financial reporting purposes but not for tax purposes. When this asset is recovered in 2013, a future taxable amount will occur and a. pretax financial income will exceed taxable income in 2013. b. Universal will record a decrease in a deferred tax liability in 2013. c. total income tax expense for 2011 will exceed current tax expense for 2013. d. Universal will record an increase in a deferred tax asset in 2013. 7. The primary difference between a direct-financing lease and a sales-type lease is the a. manner in which rental receipts are recorded as rental income. b. amount of the depreciation recorded each year by the lessor. c. recognition of the manufacturer’s or dealer’s profit at the inception of the lease. d. allocation of initial direct costs by the lessor to periods benefited by the lease arrangements. ACCT 610 (Spring 2014) – Exam 3 Dr. Anakwe Page 5 8. On September 1, 2012, Henrietta Co. issued a note payable to National Bank in the amount of $3,600,000, bearing interest at 12%, and payable in three equal annual principal payments of $1,200,000. On this date, the bank’s prime rate was 11%. The first payment for interest and principal was made on September 1, 2013. At December 31, 2013, Henrietta should record accrued interest payable of a. $144,000. b. $132,000. c. $96,000. d. $72,000. 9. On January 1, 2012, Janelle Corp. acquired a machine at a cost of $400,000. It is to be depreciated on the straight-line method over a five-year period with no residual value. Because of a bookkeeping error, no depreciation was recognized in Janelle’s 2012 financial statements. The oversight was discovered during the preparation of Janelle’s 2013 financial statements. Depreciation expense on this machine for 2013 should be a. $0. b. $80,000. c. $100,000. d. $160,000. 10. On July 1, 2013, Sunshine Co. issued 3,000 of its 10%, $1,000 bonds at 99 plus accrued interest. The bonds are dated April 1, 2013 and mature on April 1, 2023. Interest is payable semiannually on April 1 and October 1. What amount did Sunshine receive from the bond issuance? a. $3,045,000 b. $3,000,000 c. $2,970,000 d. $965,000 11. The following information is related to the pension plan of Larry, Inc. for 2011. Actual return on plan assets $20,000 Amortization of net gain 8,250 Amortization of prior service cost due to increase in benefits 15,000 Expected return on plan assets 23,000 Interest on projected benefit obligation 36,250 Service cost 90,000 Pension expense for 2011 is a. $129,500. b. $126,500. c. $113,000. d. $110,000. ACCT 610 (Spring 2014) – Exam 3 Dr. Anakwe Page 6 12. Harry Co. was organized on January 2, 2012, with 500,000 authorized shares of $10 par value common stock. During 2011, Harry had the following capital transactions: January 2—issued 375,000 shares at $14 per share. July 30—purchased 25,000 shares at $11 per share. November 30—sold 10,000 shares of treasury stock at $13 per share. Harry used the cost method to record the purchase of the treasury shares. What would be the balance in the Paid-in Capital from Treasury Stock account at December 31, 2012? a. $10,000. b. $20,000. c. $30,000. d. $40,000. 13. On January 1, 2010, Lansing Co. purchased a machine for $1,056,000 and depreciated it by the straight-line method using an estimated useful life of eight years with no salvage value. On January 1, 2013, Lansing determined that the machine had a useful life of six years from the date of acquisition and will have a salvage value of $96,000. An accounting change was made in 2013 to reflect these additional data. The accumulated depreciation for this machine should have a balance at December 31, 2013 of a. $584,000. b. $616,000. c. $640,000. d. $704,000. 14. In January 2014, an explosion occurred at Kenny Co.’s plant, causing damage to area properties. By March 2014, no claims had yet been asserted against Kenny. However, Kenny’s management and legal counsel concluded that it was reasonably possible that Kenny would be held responsible for negligence, and that $2,000,000 would be a reasonable estimate of the damages. Kenny’s $4,000,000 comprehensive public liability policy contains a $200,000 deductible clause. In Kenny’s December 31, 2013 financial statements, for which the auditor’s fieldwork was completed in February 2012, how should this casualty be reported? a. As a note disclosing a possible liability of $2,000,000. b. As an accrued liability of $2,000,000. c. As a note disclosing a possible liability of $200,000. d. As an accrued liability of $200,000. 15. The following information pertains to Hope Co.’s pension plan: Actuarial estimate of projected benefit obligation at 1/1/11 $82,000 Assumed discount rate 10% Service costs for 2011 $18,000 Pension benefits paid during 2011 $15,000 If no change in actuarial estimates occurred during 2011, Hope’s projected benefit obligation at December 31, 2011 was a. $79,000. b. $90,200. c. $93,200. d. $108,200. ACCT 610 (Spring 2014) – Exam 3 Dr. Anakwe Page 7 16. Evelyn Company purchased equipment that cost $150,000 on January 1, 2011. The entire cost was recorded as an expense. The equipment had a nine-year life and a $6,000 residual value. Evelyn uses the straight-line method to account for depreciation expense. The error was discovered on December 10, 2011. Evelyn is subject to a 40% tax rate. Evelyn’s net income for the year ended December 31, 2009, was understated by a. $80,400. b. $90,000. c. $134,000. d. $150,000. 17. For its first year of operations Trinity Corporation’s reconciliation of pretax accounting income to taxable income is as follows: Pretax accounting income $300,000 Permanent difference (15,000) 285,000 Temporary difference-depreciation (20,000) Taxable income $265,000 Trinity’s tax rate is 40%. What should Trinity report as its income tax expense for its first year of operations? A. $120,000. B. $114,000. C. $106,000. D. $8,000. ACCT 610 (Spring 2014) – Exam 3 Dr. Anakwe Page 8 18. On October 31, 2011, Simeon Builders borrowed $16 million cash and issued a 7-month, noninterest-bearing note. The loan was made by Star Finance Co. whose stated discount rate is 8%. Sky’s effective interest rate on this loan is: A. More than the stated discount rate of 8%. B. Less than the stated discount rate of 8%. C. Equal to the stated discount rate of 8%. D. Unrelated to the stated discount rate of 8%. 19. Andrea Barber Shop sold $1000 of gift cards on a special promotion on July 15, 2013, and sold $1500 of gift cards on another special promotion on August 15, 2013. Of the cards sold in July, $100 were redeemed in July, $250 in August, and $300 in September. Of the cards sold in August, $150 were redeemed in August and $350 were redeemed in September. Andrea views the probability of redemption of a gift card as remote if the card has not been redeemed within two months. At 9/30/2013, Peterson would show an unearned revenue account for their gift cards with a balance of: A. $0. B. $1000. C. $1350. D. $1500. 20. Gandhi Company bought a copyright for $180,000 on January 1, 2011, at which time the copyright had an estimated useful life of 15 years. On January 5, 2014, the company determined that the copyright would expire at the end of 2019. How much should Gandhi record retrospectively as the effect of change? A. $0. B. $24,000. C. $16,000. D. $28,800. ACCT 610 (Spring 2014) – Exam 3 Dr. Anakwe Page 9 21. Eastern purchased a machine for $500,000 and leased it to Injection, Inc. on January 1, 2013. Lease description: Quarterly rental payments $32,629 – beginning of each quarter Lease term 5 years No residual, no BPO Economic life of machine 5 years Implicit interest and lessee’s incremental borrowing rates 12% Fair value of asset $500,000 Collectibility of the rental payments is reasonably assured, and there are no lessor costs yet to be incurred. Depreciation is recorded at the end of each fiscal year (December 31). Required: Prepare appropriate entries to record inception of the lease, first and second rental payments for a) Injection b) Eastern. (15 points) ACCT 610 (Spring 2014) – Exam 3 Dr. Anakwe Page 10 22. On January 1, 2013, Auchi Industrial issued $400,000 of its 20-year, 8% bonds. The bonds were priced to yield 10%. Interest is payable semiannually on June 30 and December 31. Auchi Industrial records interest at the effective rate and elected the option to report these bonds at their fair value. On December 31, 2013, the fair value of the bonds was $335,000 as determined by their fair value in the over-the-counter market. Required: a) Determine the price of the bonds at January 1, 2013, and prepare the journal entry to record their issuance. b) Prepare the journal entry to record interest on June 30, 2013 (the first interest payment). c) Prepare the journal entry to record interest on December 31, 2013 (the second interest payment). d) Prepare the journal entry to adjust the bonds to their fair value for presentation in the December 31, 2013, balance sheet. (20 points) 23. XYZ Company had 200,000 shares of common stock outstanding on December 31, 2012. On July 1, 2013, XYZ issued an additional 50,000 shares for cash. On January 1, 2013, XYZ issued 20,000 shares of convertible preferred stock. The preferred stock had a par value of $100 per share and paid a 5% dividend. Each share of preferred stock is convertible into 8 shares of common. During 2013, XYZ paid the regular annual dividend on the preferred and common stock. Net income for the year was $300,000. Required: Calculate XYZ’s basic and diluted earnings per share for 2013. (10 points) ACCT 610 (Spring 2014) – Exam 3 Dr. Anakwe Page 11 24. The following are comparative balance sheets and on income statement for Went Company. Went Company Balance Sheets As of December 31 2013 2012 Assets Cash $ 21,500 $120,000 Accounts receivable 195,000 105,000 Inventory 180,000 225,000 Long-term investments 0 60,000 Totals $396,500 $510,000 Liabilities and shareholders’ equity Accounts payable $ 75,000 $120,000 Operating expenses payable 24,000 15,000 Bonds payable 70,000 100,000 Common stock 125,000 125,000 Retained earnings 102,500 150,000 Totals $396,500 $396,500 Went Company Income Statement For the Year Ended December 31, 2013 Sales $560,000 Cost of goods sold: Beginning inventory $225,000 Purchases 330,000 Goods available for sale 555,000 Less: ending inventory 180,000 Cost of goods sold 375,000 Gross profit 185,000 Operating expenses 180,000 Income from operations 5,000 Other expenses Loss on sale of long-term investments (7,500) Net loss $ (2,500) Cash dividends declared in 2013 was paid in 2013 Required: Prepare a statement of cash flows for 2013, using the indirect method.